Monday, December 6, 2010

As an angel investor who has considered hundreds of startup opportunities, the concept of a value proposition may be the most misunderstood and taken for granted element that I see in newly formed startups. While entrepreneurs freely throw around the term “value proposition,” they rarely offer a thoughtful explanation for the “value” their business is providing and, more importantly, an understanding of who their real customer is and what valuable benefit their customer perceives they are receiving.

To address this gap, I’d like to discuss a basic value proposition definition below.

The value proposition is a short statement that clearly communicates the target customer, the customer’s problem and the pain that it causes, the unique solution that addresses this problem, and the net benefit of this solution from the customer's perspective.

Let’s consider each of the four elements of the value proposition definition above:

The target customer. Many entrepreneurs quote a large market size and impressive dollars spent in the market, but not many entrepreneurs can name specifically who will buy the proposed product or service, and how many of these customers exist. To identify a target customer, it helps to document a customer profile statement, identifying all of the traits known about the customer and what makes them different and unique from the larger market population. Out of this exercise comes a clearer understanding of what makes them a “target” customer. It’s not uncommon that a company serves more than one target customer, leading to a customer profile for each type.

The customer’s problem and the pain that it causes. Entrepreneurs should clearly articulate the customer’s problem that they are addressing in layman’s terms. The problem definition should also include a description of the level of pain it causes. This step is often overlooked, as entrepreneurs frequently assume a pain level that is greater than actually exists for the customer. This hopeful thinking comes from a lack of study and the development of empirical evidence that supports the relative importance of the painful problem. While the pain level can be expressed in dollars, what matters here is the extent to which the target customer desires that the problem be solved relative to current solutions. This step is critical to the potential of the startup enterprise. The more painful the unsolved customer problem, the greater the opportunity is for a startup’s success. Overestimating the pain level of a customer problem causes time, money and talent to be spent on a mission that leads to disappointment and frustration.

The unique solution that addresses this problem. Here, the startup is addressing the core purpose of its new business. What makes the solution worth pursuing? Why is the venture worthy of investment? What has the startup discovered that others in the market before it have missed? When its unique solution solves a customer’s painful problem better than all other available options, the startup has successfully cleared an important early hurdle to a successful venture. Again, evidence here is key. Demonstrating that a customer exists with a painful problem that the company solves better than anyone else makes for a compelling startup beginning.

The net benefit of this solution from the customer’s perspective. Here is where true potential is discovered. First, value is strictly perceived in the eyes of the customer. If the startup sees its solution as very valuable, but the target customer doesn’t, there is no foundation on which to build a company. Second, the benefit of the solution must be weighed against its cost and compared to all other options available to the customer. This is a critical element of understanding in considering growth potential and ultimate market capacity.

The value proposition is a primary foundation characteristic that I consider as an angel investor. When starting a new enterprise, entrepreneurs should offer a strong value proposition case, one that includes empirical evidence that demonstrates you know who your customer is, that they have a painful problem worth solving, and that you offer a unique solution that they perceive provides more net benefit than other available options.

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Today’s article is presented by my friend Joseph A. Bockerstette, now living in Phoenix, Arizona, an active investor, business advisor, and a founding member of the Main Street Venture Fund. You can contact him directly at jbockerstette@me.com.

3 comments:

i am always looking for interesting musings on the "beginning" for people just getting going with starting or building a company or an idea. Clearly, you know of what you speak, and are of a similar mind.I wrote a guide called hownot2suck @ businessnbeing. it's part information, part artwork. anyway, its avail here: hownot2suck.comi'm on twitter @businessnbeing hoping you're well otherwise, ron proulx